Phil Falcone, the billionaire hedge fund manager whose firm made $11bn
(£6.9bn) from the sub-prime crisis, is being sued by investors after a $3bn
bet to create a US-wide mobile broadband service appeared to hit the
buffers.

Mr Falcone, pictured with wife Lisa Maria, famously made $11bn from betting against the booming US mortgage market.Photo: GETTY

By James Quinn and Richard Blackden

11:00PM GMT 18 Feb 2012

Mr Falcone, chief investment officer of Harbinger Capital Partners, stands accused of misleading investors over its decision to invest in the service through its acquisition of LightSquared.

Court filings lodged in New York accuse him and one of the firm's investment funds of investing in LightSquared even though the original aim of the fund was to invest in distressed debt and sub-prime mortgages.

Mr Falcone famously made $11bn from betting against the booming US mortgage market, after taking short positions in late 2006, delivering a 116pc return for his flagship Harbinger Capital Partners Fund.

But investor Lili Schad, who invested $4m with Harbinger, claims in the court documents that she was not told that Harbinger was investing 60pc of the fund's money into the new technology venture.

She is leading the lawsuit, seeking unspecified damages and return of all funds, with the aim of it being granted class action status so all Harbinger investors could benefit.

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That venture hit the buffers earlier this week when the US government blocked LightSquared from beginning its service.The US Federal Communications Commission (FCC) said the signal could interfere with GPS navigation of planes and cars. As a result, Mr Falcone is now battling to save LightSquared, in which Harbinger has invested $3bn to date.

In the lawsuit, a copy of which has been seen by The Sunday Telegraph, Mr Falcone is accused of making "deceptive and misleading" statements with regard to his intentions.

Ms Schad claims that LightSquared is "facing insolvency", citing industry analyst Tim Farrar who said after the US FCC ruling that LightSquared "must now consider whether to file for bankruptcy and preserve its resources for the inevitable litigation fights, or continue pretending that all of its problems can be overcome while its cash drains away".

The suit is claiming breach of fiduciary duty to investors, gross negligence, breach of contract, and fraudulent misrepresentation.

According to reports, during a conference call with investors last Friday, Mr Falcone said he is sticking with plans to build the mobile broadband service despite the FCC setback. Neither Mr Falcone nor Harbinger has commented on the lawsuit, filed in the Southern District of New York.

Separately, Mr Falcone and Harbinger have been issued with "Wells Notice" by the US Securities and Exchange Commission which is investigating whether the firm engaged in "market manipulation" of mortgage-related securities from 2006-2008.

In a statement detailing the issue of the notices by the SEC, Harbinger said it was "disappointed" and that if the SEC did bring enforcement action, it would "vigorously defend against it".